The U S financial markets had one hell of a roller coaster ride today. In the short duration of less than one hour the Dow Jones Industrial average plunged 1,000 points and then recovered by approximately 600 hundred points to finish the day down 347 points. There is quite a lot of guessing about what set off the panic selling, including rumors of fat fingered electronic traders that accidentally made a “comma error”, such as giving the command to execute a trade in billions instead of millions. But hours before and after the massive trade swings in the market the videos of riots in Greece were all over the cable outlets.
Greece, because of its very familiar looking fiscal insanity, must institute austerity measures (a euphemism for cutting government spending) that its citizens find unacceptable. For weeks it has been the considered opinion of the financial media that the fate of Greece was in the hands of the European Union, and particularly Germany, whose banks held the most Greek debt and subsequently the greatest risk of loss. Today, however, with the scenes of riots in the streets the public perception of Greece’s problems has changed and many traders on Wall Street point to this public rebellion as the first of what may become many EU member repudiations of debt owed to foreign countries.
The massive selloff, which began shortly after 2 p.m. ET, amplified concerns about the spreading European debt crisis as the approval of austerity measures by the Greek Parliament sparked renewed rioting in Athens.
“There is simply a growing recognition that Greece has got to default,” banking analyst Dick Bove told CNBC.com. “The riots in the streets showed the decision to repay the debt was not going to be made by the people in Germany, France and Switzerland–it’s going to be made by people in Greece and they’re not going to repay it.”
There also is a growing sense that any collapse of Greece could trigger a wave of defaults across Europe and even the world.
“We’ve seen a crisis start in a country–Greece–become regional, impact the whole of the Euro zone and is on the verge of truly going global,” El-Erian, CEO of the world’s biggest bond fund, told CNBC shortly before the selloff began.
As one U S analyst commented: “Is the market now seeing Greece and Europe as the canary in the coal mine for us? We all know we have budget and deficit issues.” But even if this panic was the result of one idiot trader hitting the wrong key on his Bloomberg machine, it illustrates the high wire act that international finance has become. The fundamental problem with Greece is that the country has been run by politicians that promulgated a fiscal policy akin to “kicking the can down the road”. When the party stopped on the day they could no longer sell their debt to EU banks they hit the panic button. Investors are understandably concerned that Greece is just the first of several EU nations (Portugal, Ireland, Italy and Spain) that will either fail or become nothing less than wards of other European countries. Anyone who has read history knows that, among the possible consequences of conditions such as this are wars and asymmetrical conflict.
And if that’s not enough bad news for you to get your head around consider that in these United States there is no small amount of animosity on the issue of fiscally responsible and fiscally irresponsible states in our own union. It’s sort of like the EU conflict as a preview. Just as Germans are looking hard at bailing out Greece, why should we be surprised if any Texan, for example, takes a dim view of sending their own tax receipts to bail out California (which they are doing, among other wealth transfer mechanisms, via the unlimited unemployment insurance subsidy)? Ironically, Greece, the other PIIGS and the EU may provide the template for the solution to the United State’s own fiscal irresponsibility.
Upadate: During the sell off today there were several references to Lehman Brothers by the talking heads. The tacit point of these comparisons, in short, is that EU banks may be encountering trouble rolling over the debt that funds their daily operations. Readers should remember that it was the inability to roll over short term funding vehicles like commercial paper that sounded the death rattle for Bear Stearns and Lehman Brothers.